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Caught In A Strategic Debt Trap, Sri Lanka Faces Its Worst Economic Crisis In Decades

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China did not yet accede to a Sri Lankan request for a $2.5 billion credit line or a restructuring of its overall debt. About 22% of Sri Lanka’s debt is owed to bilateral creditors — China and Japan (10% each) as well as India (2%).

Now, Sri Lanka faces its worst economic crisis in decades and struggles to pay loans, China turns a blind eye after ensnaring the island nation into a debt trap.

However, Sri Lanka, was a flourishing island nation of 22 million, and has finally fallen to China’s debt-trap diplomacy.

Sri Lanka is now facing the worst economic crisis since gaining independence in 1948. The recession is attributed to foreign exchange shortages caused by the clampdown on tourism during the Covid-19 pandemic. This has left the country unable to buy enough fuel, with people facing acute scarcity of food and basic necessities, heating fuel and gas.

Having a giant, increasingly assertive neighbour so closely intertwined with Sri Lanka has unsettled India, which is locked in a standoff with China at their disputed Himalayan border. Sri Lanka’s economic crisis affords India an opportunity to wean the country away from Beijing’s influence.

China’s presence is of concern to India, true. But India and Sri Lanka are also maritime neighbours. Any instability in Sri Lanka will have a spill over effect on India.

As the economic crisis took hold of Sri Lanka, India has made a serious effort to bail out its beleaguered neighbour.

Since January, it has helped Sri Lanka with $2.4 billion, including a $400-million currency swap and a $500-million loan deferment. Last month, Sri Lanka signed a $1-billion credit line with India for the procurement of food, medicines, and other essential items.

A major problem that Sri Lanka is facing is its huge foreign debt burden, and it owes over $5 billion to China alone. Sri Lanka’s foreign reserves are shrinking partly because of construction projects built with Chinese loans that are not making money.

Its dollar-denominated debt repayments due this year total more than $6 billion, including a sovereign bond of $1 billion maturing in July, according to the think tank European Foundation For South Asian Studies (EFSAS).

There is growing concern among rating agencies and economists that the country would not be able to pay even this, EFSAS adds. A recent report in the Hong Kong Post put it, the end result of reckless borrowing.

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